Trump wants US businesses to cut all ties with China: why that’s a lose-lose plan

Donald Trump has “ordered” American companies by tweet to stop doing business with China. Even with the US president’s shifting whims, what if his wish were to come true?

In an extreme scenario, if US-China trade and US manufacturing in China were to grind to a halt – when US companies no longer had any business with or in China – what would be the implication for American consumers, its companies, workers and innovation?

US consumers would suffer considerably, with a narrower selection of shoddier goods costing more, driving up inflation.

Had Trump not delayed tariffs for the not-yet-targeted Chinese goods until mid-December, US consumers would have had a foretaste of US-China decoupling this Christmas.

Could Vietnam and Mexico replace China? Not for the breadth and depth of goods made in China, nor for the price, quality and value combination.

Smuggling into the US of otherwise legitimate consumer items would be rampant. Shopping trips to Canada and Mexico would become popular. US consumers would face a declining standard of living. The middle class and the working class would be hardest hit.

American companies, without access to the world’s most important supply chain, would lose out in competitiveness. In the global production system, China cannot be replicated even if there were 10 Vietnams working in concert over a long period.

Many American firms would see their market positions in China taken over by their German, Japanese, Korean or Chinese counterparts. Without the China market, some leading US companies would be greatly diminished, even if they could remain viable.

Many US workers, including those in the retail and manufacturing sectors, would lose their jobs. The days when Chinese manufacturing jobs could return to the US are long gone – many of those jobs cannot even stay in China, while workers are being replaced by robots in some cases.

Some Chinese jobs would go to other parts of Asia and Africa, often in Chinese-owned factories.

The US economy would become less innovative. From Boeing to Hollywood studios, US companies would be left with much-reduced revenues to support innovation.

Being denied access to China-made components would mean the US was not a viable start-up location for many hardware-based ventures.

Many start-ups already find the supply ecosystem in Shenzhen more effective than that of Silicon Valley. China and the likes of Singapore may become more attractive innovation hubs at the expense of the US.

The US owes its dynamism to attracting the best and brightest from the world to its open economy.

In decoupling from China, it would become a far less attractive destination for global talent – as it would cease to be a place where global resources may be effectively marshalled to facilitate innovation in many fields.

America would lose key ingredients which make it great. The US has some unassailable edges over China: radical innovation and draw for global talent.

A key motivation for recent American moves against China has been sustaining US economic dominance by containing China’s rise. Decoupling the US economy from China’s would have the opposite effect – by undermining its key advantages over China.

The impact of any such decoupling on China’s manufacturing would be huge.

Many Chinese companies, mostly smaller and weaker ones, may go out of business – resulting in a significant contraction of manufacturing capacities. With consolidation in many industries, only the stronger companies would remain.

Without access to US technologies, many Chinese firms would suffer, especially if no alternatives could be found in Europe or Asia. But that would only accelerate technology development in Chinese companies.

The key divergence is between workers in the two countries. In the US, many high-end jobs would disappear while some low-end jobs may become available. US companies with good knowledge-based jobs, hitherto leveraging China’s supply chain and its vast market, would wither.

In China, many low-end jobs would vanish while more high-end jobs would be created. High unemployment in the immediate aftermath of decoupling would be followed by the creation of high-value jobs in due course.

While economic coupling has boosted China’s development, it has also kept the US on top. Decoupling would do the opposite.

In the context of a global slowdown or even recession, it may partially reverse the relative decline of Europe and Japan, and spread the growth among developing economies. More than slowing China for a time, it would hasten the US’ decline.

As the economies of US and China decouple, both nations would suffer tremendously but their destinies would diverge. One would face immediate quantitative contraction while the other would see long-term qualitative decline.

The reason is simple. With its unrivalled manufacturing base and vast market, China can hope to catch up with US technologically, albeit with high risks and uncertainties.

As a service-oriented economy, the US simply cannot replace, or find viable replacements for, China’s huge and uniquely competitive production machinery without taking major steps backwards.

Without the Chinese supply chain and the vast China market, many US companies would be displaced by non-US rivals. In decoupling, the US would not be isolating China, but itself, from the global production network.

In a bifurcated world, the US would suffer long-term and sustained decline in its economic competitiveness and standard of living.